Cambridge Syllabus Notes

Cambridge IGCSE Business Studies 0450

Topic 3.1.2 – Understanding Market Changes

Learning Objective

Explain why some markets are becoming more competitive and evaluate the impact of increased competition on the six functional areas of a business.

Glossary (Key Terms)

Perfect competition – Many sellers, identical products, no barriers to entry, price‑taker.
Monopolistic competition – Many sellers, differentiated products, low barriers to entry.
Oligopoly – Few large sellers, high barriers to entry, products may be similar or differentiated.
Monopoly – One seller, high barriers to entry, price‑setter.
Barriers to entry – Obstacles that make it difficult for new firms to enter a market (e.g., high start‑up costs, patents, regulation).
Economies of scale – Cost advantage that arises when production is increased, lowering average cost per unit.
Innovation – Introduction of new or significantly improved products, processes or services.
Changing consumer spending patterns – Shifts in what, how, and why customers buy, often toward quality, sustainability or customisation.
Increased competition – A rise in the number of rivals or the intensity of rivalry within a market.

Comparison of Market Structures

Structure	Number of Sellers	Product Type	Barriers to Entry	Price‑Setting Power	Typical Example
Perfect competition	Very many	Homogeneous	Very low	None (price‑taker)	Agricultural markets (e.g., wheat)
Monopolistic competition	Many	Differentiated	Low	Limited (influenced by rivals)	Clothing retailers
Oligopoly	Few	Similar or differentiated	High (capital, technology, brand)	Considerable (strategic interaction)	Mobile‑phone manufacturers
Monopoly	One	Unique	Very high (legal, natural‑resource, technology)	Full (price‑setter)	Water supply in many towns

Key Drivers that Make Markets More Competitive

These six drivers directly create increased competition by lowering barriers to entry or altering cost structures.

Technological advances – Automation, digital platforms and low‑cost communication reduce start‑up costs and open new distribution channels.
Globalisation – Trade liberalisation, reduced tariffs and faster transport enable foreign firms to enter domestic markets.
Changing consumer spending patterns – Growing demand for quality, sustainability, ethical production and customisation forces firms to differentiate.
Regulatory changes – Deregulation, new competition law or removal of licensing requirements increase market openness.
Economies of scale – Large firms can produce cheaper, putting price pressure on smaller rivals and prompting market consolidation.
Innovation & product development – Shorter product life‑cycles and continual upgrades raise the competitive bar.

How Each Driver Alters Market Structure

Driver	Effect on Barriers / Cost Structure	Typical Resulting Shift in Market Structure
Technological advances	Reduces fixed start‑up costs; creates new distribution channels	More entrants → shift toward monopolistic competition
Globalisation	Lowers transport & tariff costs; expands potential market size	Increased number of rivals, greater product variety
Changing consumer spending patterns	Raises demand for differentiated, niche products	Firms adopt niche strategies → more intense rivalry
Regulatory changes	Removes legal entry barriers or introduces competition‑friendly rules	New entrants emerge; existing firms must adapt pricing/marketing
Economies of scale	Large firms achieve lower average costs	Pressure on smaller firms → possible consolidation or price wars
Innovation	Shortens product life‑cycles; raises R&D spending	Continuous pressure to launch new or improved products

Business Responses to Increased Competition (Syllabus Strategies)

For each driver, firms typically adopt one or more of the five strategic responses listed in the IGCSE syllabus.

Driver	Typical Strategic Response(s)
Technological advances	Cost‑leadership (automation, lower unit costs); product‑development (new digital features)
Globalisation	Market‑development (exporting, joint ventures); market‑penetration (price‑matching in new regions)
Changing consumer spending patterns	Differentiation (eco‑friendly, premium quality); product‑development (customisable options)
Regulatory changes	Market‑penetration (aggressive pricing to capture newly opened market); cost‑leadership (adapting processes to meet new standards efficiently)
Economies of scale	Cost‑leadership (large‑scale production); market‑development (leveraging low cost to enter new markets)
Innovation	Product‑development (frequent launches); differentiation (unique features, technology)

Impact of Increased Competition on the Six Functional Areas

1. Business Activity (Purpose & Objectives)

Objectives may broaden from pure growth to include market‑share protection, cost‑leadership, rapid product innovation or sustainability.
Strategic planning becomes continuous; regular SWOT and PESTLE analyses are used to anticipate new entrants (AO2).

2. People in Business (Human Resources)

Higher demand for staff skilled in R&D, digital marketing, data analytics and supply‑chain management.
Training focuses on creativity, adaptability and continuous improvement (AO3).
Performance incentives linked to market‑share growth, product‑launch speed or cost‑saving targets.

3. Marketing (4 Ps + Market Research & Entry Strategies)

Product: Emphasis on differentiation, quality, eco‑friendly attributes, or modular design.
Price: Competitive pricing, price‑matching, value‑based pricing or dynamic pricing to retain customers.
Place: Expansion into online marketplaces, third‑party platforms, and global distribution networks.
Promotion: Greater use of digital advertising, influencer partnerships, personalised email campaigns.
Market research: Ongoing primary (surveys, focus groups) and secondary (industry reports) research to track changing consumer spending patterns.
Entry strategies: Exporting, licensing, joint ventures or wholly‑owned subsidiaries when domestic competition intensifies (AO2).

4. Operations Management

Adoption of lean production, just‑in‑time inventory and automation to achieve cost‑leadership.
Quality management systems (e.g., ISO) become a source of differentiation.
Supply‑chain diversification reduces reliance on single suppliers and mitigates risk from global competition.
Process innovation (e.g., AI‑driven forecasting) supports rapid product‑development cycles.

5. Finance

Firms may seek external finance (equity, long‑term loans) to fund R&D, marketing and capacity expansion required by competitive pressure.
Enhanced cost‑control tools – budgetary control, variance analysis, contribution per unit – become essential for maintaining profit margins.
Cash‑flow forecasting is used to ensure sufficient liquidity for aggressive market‑penetration or product‑development programmes.

6. External Influences (PESTLE)

Political: Trade agreements, competition law and government subsidies directly affect market openness.
Economic: Exchange‑rate movements and inflation influence import‑export competitiveness and pricing strategies.
Social: Ethical concerns (fair‑trade, sustainability) shape product development and branding.
Technological: Cloud computing, AI, IoT create new business models and lower entry barriers.
Legal: Advertising standards, consumer‑rights legislation raise compliance costs but also protect reputable firms.
Environmental: Carbon‑footprint regulations can be a barrier for firms lacking green technology; conversely, they offer differentiation opportunities.

Illustrative Example – Mobile‑Phone Market

Technological advances: 5G networks and modular operating‑system platforms reduce development costs, encouraging new brands.
Globalisation: Component sourcing from multiple continents and global e‑commerce platforms let firms from South Korea, India and the USA compete worldwide.
Changing consumer spending patterns: Demand for high‑resolution cameras, long battery life and recyclable packaging forces firms to differentiate.
Regulatory changes: Recent EU tariff reductions on imported phones and stricter e‑waste directives reshape cost structures.
Economies of scale: Established giants (Apple, Samsung) achieve lower per‑unit costs, pressuring smaller players to focus on niche features or price.
Innovation: Average product‑life cycle is now ≈12 months, forcing annual model launches and continuous R&D investment.

Result: a highly competitive market characterised by many brands, rapid product turnover and intense price rivalry.

Summary Checklist for Revision

Identify the six drivers that lower barriers to entry or change cost structures.
Link each driver to the specific cause of increased competition (more entrants, intensified rivalry).
State the typical market‑structure shift that results from each driver.
Match drivers to the appropriate strategic response(s) from the syllabus (cost‑leadership, differentiation, market‑penetration, market‑development, product‑development).
Explain how heightened competition affects each functional area, citing at least one AO‑aligned action per area.
Use real‑world data (market‑share figures, price trends) to support explanations.
Evaluate the advantages and disadvantages of increased competition for consumers, firms and the wider economy.

Suggested Diagram

Flow‑chart: Drivers (Technology, Globalisation, Consumer Spending, Regulation, Economies of Scale, Innovation) → Reduced Barriers / Changed Costs → Shift in Market Structure → Business Responses (Cost‑leadership, Differentiation, etc.) → Effects on the Six Functional Areas.

Command‑Word Box (Exam Practice)

Command Word	What the Examiner Wants
Define	Give a concise meaning.
Explain	Give a detailed account of reasons or causes.
Describe	Give a detailed account of features or characteristics.
Analyse	Break down information into components and examine relationships.
Evaluate	Make a judgement, weighing advantages and disadvantages.
Apply	Use knowledge to a new situation or case study.

Practice Questions (with Assessment Objectives)

(AO2 – Apply) Using the mobile‑phone market example, apply two of the six drivers of competition to explain why a new Chinese brand could successfully enter the UK market.
(AO3 – Analyse) The chart below shows the market‑share of four smartphone manufacturers from 2018‑2022. Analyse the impact of increased competition on the market‑share trends.
(AO4 – Evaluate) Evaluate whether the rise in competition in the smartphone market is more beneficial to consumers or to firms, giving at least two points for each side.

Sample Data for Question 2

Year	Brand A	Brand B	Brand C	Brand D
2018	35 %	30 %	20 %	15 %
2019	30 %	32 %	22 %	16 %
2020	28 %	34 %	24 %	14 %
2021	25 %	36 %	27 %	12 %
2022	22 %	38 %	30 %	10 %

Evaluation – Is Increased Competition Always Positive?

Structure a balanced answer using the points below.

For consumers: lower prices, greater choice, higher quality, faster innovation.
For firms: pressure on profit margins, need for continual R&D investment, risk of market exit; however, opportunities arise for niche positioning, efficiency gains and market‑development abroad.
For the wider economy: stimulates job creation in new firms and can boost GDP; conversely, over‑capacity may lead to business failures and short‑term unemployment.

Weigh these arguments and conclude with a reasoned judgement based on the specific market context you are discussing.

why some markets are becoming more competitive